October 25, 2004
Both Bush And Kerry Miss The Mark On Health Care (Post #3 of 9)
Posted by Nick Infusino

III. President Bush's Association Health Plans

Association Health Plans (AHP) are another proposal that President Bush hopes will solve the high insurance premium problem. AHP's would allow small-businesses to band together to create a larger insurance pool. By the theory of "power in numbers", the association will then be able to negotiate more favorable health insurance rates from an insurance provider.

AHP's have many flaws is both the assemblage and the administration of the associations (see Kansas's 1980's experiment with AHP's in which many plans did not charge enough to its participants and the plans ended up going broke), but I will only focus on the one problem that I deem most alarming-- discrimination. AHP's suffer from the problem of redlining. Any rational small-business will not form an association with any other small-businesses whose employees create a greater risk than that of its own. Therefore, small-businesses with many employees in high-risk health categories will be frozen out by other small-businesses with less risky employees looking to reduce premiums. This will lead to two major problems: the first is that small-businesses will discriminate against other small-businesses in the formation of associations based on age, race, disability or any other actuarial category that will raise premiums; and the second problem is that the small-businesses in the greatest need of health care relief will be unable to attain it, leaving employees most in need of insurance uninsured.

Edit: I wanted to address an question that was emailed.
So since all won't benefit equally, none should benefit at all?
I agree that something needs to be done even if it has
disproportionate effects. the problem with AHPs is that the value of
have a large number of insureds is not so great as to reduce premiums
by that much. That is why most large companies are self insured with
an umbrella policy to cover the plan. This trend shows that the
associations will tend towards self insurance as well (once there are
enough participants to make it actuarially sound). The question then
becomes: who will administer this plan when there are numerous
employers? The association will likely hire a 3rd party administrator to run the plan (much like the failed Kansas experiment in the 80's).

Discrimination comes into affect once this association is formed. If
an association has low premiums, then more high risk companies will try to join the association. When they are rejected, the companies will file discrimination suits to enter the plan. The plan will have to formulate nondiscriminatory exclusion procedures (much like insurance companies do)in order to justify the exclusion. Reduced premiums would not be a sufficient justification. The costs of defending the suits will raise the administrative costs of the plan. If an association loses its control over who to let into the association then the benefits of forming an association will be minimal since the plan will have a wide spectrum of risks. Therefore, the only affect an association would have is to reduce the costs for high risk companies and raise the costs for low risk companies while creating a flood of litigation (low risk companies would probably stop forming associations because of this leaving only high risk companies). This would not solve the health care crisis.

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